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3 Reasons Why Sellers Hate FHA Loans

Trying to purchase a home in a fiercely competitive housing market, where sellers swiftly receive multiple offers above asking price without contingencies, presents a formidable challenge for buyers. Individuals submitting offers with government-backed home loans, particularly Federal Housing Administration (FHA) loans, often encounter rejections in the real estate realm. 

Let’s dive into why certain sellers shy away from FHA loans and explore strategies for buyers facing hurdles in gaining acceptance for their offers.

Is It Possible for Home Sellers to Decline Offers Supported by an FHA Loan?

Yes, indeed, in a competitive seller’s market, a homeowner may receive multiple offers to choose from, including all-cash offers that bypass the mortgage process. In such a local market, the seller often turns down conventional mortgage-backed offers. 

Sellers have the liberty to select the offer that suits them best without any legal obligation to consider or accept FHA offers or any others.

Understanding Government-Backed Mortgage Loans

Government-backed mortgages aim to facilitate homeownership for first-time or low- to moderate-income buyers facing challenges in securing loans from traditional lenders. By guaranteeing these loans and assuming the risk if the homeowner defaults, the government mitigates risks for lenders.

Examples of government-backed mortgage loans include FHA loans, Department of Veterans Affairs (VA) loans, U.S. Department of Agriculture (USDA) loans, government business loans, disaster-relief loans, and agriculture loans.

3 Reasons Why Sellers Don’t Like FHA Loans

If you’re a buyer, you may wonder why certain sellers decline FHA loan offers. Here, we delve into the top three reasons.

1. Stringent Requirements Around Home Inspection and Appraisal

When a seller accepts an offer financed by an FHA loan, they agree to meet standards beyond those of conventional lenders. The FHA process ensures the home bought is safe, healthy, and conducive to wealth growth. FHA mortgages adhere to strict HUD appraisal guidelines, more rigorous than those for conventional loans.

To finalize the mortgage, the home undergoes a detailed appraisal to demonstrate compliance with FHA requirements. While an inspection isn’t mandatory, the property must meet HUD’s standards through an approved FHA appraiser’s assessment for safety and soundness.

Differences in FHA and Conventional Loans

FHA appraisal standards differ from those of conventional lenders. While conventional lenders focus on assessing if the house’s value serves as adequate security for the loan, the government aims to ensure that home buyers purchase safe, livable, and healthy homes. To achieve this, the three government agencies that insure home loans enforce unique rules and requirements not found in other loan programs.

FHA Appraisal Warning Signs

Any issues that impact the health and safety of a home must be addressed by the seller before loan approval. This encompasses non-functional systems such as electrical, HVAC, plumbing, water supply, and wastewater removal.

For instance, if the FHA appraiser notes that your septic tank is nearing the end of its lifespan, replacement may be necessary for mortgage approval, regardless of its maintenance history.

This requirement may deter sellers from accepting FHA loan offers.


If a seller wishes to proceed with the sale, they might need to address any repairs identified during the FHA appraisal process for their home.

Necessary repairs typically involve ensuring:

  • Health and safety concerns
  • The property’s security
  • The structural integrity, or soundness, of the residence

FHA Livability Standards Could Pose Expenses for Sellers

Sellers must complete Seller’s Disclosure forms as required by law when selling their home. Their responsibility is to disclose known issues, not to actively seek out problems.

If new issues are uncovered during the FHA appraisal, resulting in a denied home loan, sellers may need to relist the property and reveal these newly found problems to potential buyers. This is a situation that many sellers in a competitive market may prefer to avoid.

2. Earnest Money And Down Payment Concerns

Home sellers may find themselves captivated by offers flaunting substantial earnest money deposits. However, it’s important to note that the average home buyer utilizing an FHA loan may not have surplus cash available at the outset.


If a home buyer has limited cash for a down payment, mortgage approval may be more challenging based on their financial situation. Conversely, a substantial cash reserve can significantly alleviate a lender’s concerns regarding past credit issues.

Your earnest money is incorporated into the down payment, thus making no difference to sellers in terms of sale proceeds. Sellers recognize that offering more cash upfront increases the likelihood of approval. Cash can serve as a compelling incentive for sellers seeking a seamless transaction.

3. Extended Time To Close

Due to increased requirements and government oversight, FHA loan approvals typically experience longer processing times compared to conventional mortgages. Consequently, sellers accepting FHA loans often face extended wait times before reaching the closing stage.

Is it Possible to Waive the FHA Home Appraisal Requirements?

In a competitive market, you’ll find yourself in bidding wars where buyers may waive contingencies to make their offers more appealing. However, unlike conventional loans, FHA loans don’t allow buyers to skip appraisal requirements. 

With a conventional loan, buyers can purchase a home as is, as long as the appraisal meets the lender’s standards. They can then choose to handle repairs themselves. This flexibility is lacking with FHA loans, as sellers must adhere to FHA appraisal guidelines. 

This places FHA loan users at a potential disadvantage compared to all-cash or conventional loan buyers.

Are there constraints on sellers’ freedom to select from offers?

Home sellers typically have the freedom to choose their buyer, but there are two crucial considerations to keep in mind.

Tax Rules for Sales to Family Members

When selling your home to a family member, it’s crucial to navigate potential tax implications wisely. The IRS scrutinizes these transactions to ensure compliance with gift tax regulations and prevent tax evasion schemes.

Fair Housing Laws

Home sellers must adhere to federal, state, and local equal opportunity housing laws that forbid discriminating against home buyers based on race, color, religion, sex (including gender identity and sexual orientation), familial status, national origin, and disability. 

When making decisions, sellers should focus on financial and legal factors, such as contingencies in the offer. It’s crucial for sellers to provide a clear rationale for selecting a less financially beneficial offer that is free from any form of discrimination.

How to Proceed If Your FHA Loan Offer Isn’t Accepted?

As an FHA borrower encountering challenges in purchasing a home with your FHA mortgage approval, there are specific measures you can implement to navigate this situation effectively.

Look Into Conventional Loan Options

Conventional loans have stricter credit requirements, but perfect credit isn’t necessary: Most lenders set a minimum credit score of 620. Some may think conventional loans mandate a 20% down payment, confusing it with the threshold to avoid private mortgage insurance (PMI). At Rocket Mortgage®, a 3% down payment is typically required.

With an FHA loan, you’ll need to pay upfront and annual mortgage insurance premiums. Overall, PMI costs may be lower than MIP on FHA loans, as PMI is removed once the homeowner hits 20% home equity. MIP payments, however, last at least 11 years or potentially for the loan’s entire term depending on the initial down payment.

Expand Your Home Search

Living in a high-cost housing market and dreaming of owning a home? Consider broadening your search beyond the city center to benefit from more affordable prices elsewhere. However, your interest in this concept hinges on your readiness to reside outside the urban hub and the cost of commuting. If you have the flexibility of remote work, this could lead you to a budget-friendly home option, with reduced competition from fellow buyers.

Explore First-Time Homebuyer Programs

Numerous national programs exist to aid first-time home buyers with low to moderate incomes. Furthermore, your state or local government may offer additional assistance programs. HUD hosts a comprehensive database of these initiatives.

Increase Your Savings for a Larger Down Payment

A substantial down payment can enhance your chances of qualifying for a conventional loan, especially if you have a history of credit issues. By investing more upfront in the property, the lender’s risk decreases. Additionally, a larger initial investment demonstrates your dedication to a financial objective – a crucial indicator of fiscal responsibility. This commitment may also instill confidence in lenders regarding your commitment to repaying the mortgage.

Key Takeaways

Home buyers aiming to secure FHA-backed loan offers may face more challenges than conventional borrowers until the housing market shifts towards a widespread buyer’s market. During this period, pursuing approval for a conventional loan could be a more viable alternative if it aligns with your financial situation.

Ready to embark on your journey to homeownership? Take the next step by applying online today to discover the loans you’re eligible for.

Picture of Reed Letson

Reed Letson

Reed offers two decades of expertise as a mortgage broker, focusing on veterans and first-time home buyers. With a strong grasp of real estate and mortgage markets, he empowers clients with practical insights. Reed's passion is guiding clients to build wealth through real estate investments and financing solutions.

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